Kahler v Castle Hill Country Club Ltd

According to its website Castle Hill Country Club (the “Club”) is “one of Sydney’s leading private golf clubs and for many years has been recognised among the top 100 golf courses in Australia”. It is a company limited by guarantee and is subject to the Registered Clubs Act 1976 (NSW) (the “Clubs Act”). Like many such clubs, it has been exploring renovating its members’ facilities by entering into an agreement with a commercial third party, including dealing with some of the Club’s land.

By notice dated 23 May 2017 (the “Notice”), members of the Club were notified of a general meeting proposed to be held on Monday, 19 June 2017 (the “Meeting”) to consider this resolution (the “Resolution”):

The covering letter (reproduced as Schedule A to these reasons) stated that the directors unanimously urged members to pass the Resolution. The Notice, including the accompanying Explanatory Note (the “Explanation”), is reproduced as Schedule B to these reasons.

Mr L Gor of Counsel, who appeared for the Club, candidly accepted that the intent and effect of the Resolution was to give the Board of the Club “carte blanche” to negotiate and enter into an agreement for the redevelopment of what the Resolution referred to as the PRA. That area excluded the golf course, but included the clubhouse (excluding the licensed premises) and land around the clubhouse, including the car park.

The plaintiff, Mr Kahler, is a member of the Club. He was represented by Mr M Condon of Senior Counsel and Mr N Kabilafkas of Counsel. While not opposed in principle to the redevelopment of the Club, Mr Kahler raised a number of concerns about the Meeting, including that the information provided to members by the Explanation was inadequate.

After an urgent interlocutory hearing conducted in the Duty List, I was satisfied that there were serious questions to be tried with a strong likelihood of success for Mr Kahler that:

I was also satisfied that the balance of convenience favoured the Meeting being restrained and that this was not a case where judicial reticence about restraining meetings should be applied.

At the conclusion of the hearing (being late on the Friday afternoon before the Monday on which the Meeting was to be held), the Court made this order:

These are the reasons for that order being made.

The proceedings were commenced and determined on an interlocutory basis during the two week period that I was Duty Judge.

Mr Kahler’s legal representatives came before the Court on Thursday, 8 June 2017. Orders were made abridging the time for service of the summons and supporting affidavit, with the matter being returnable before me on 9 June 2017 at 2.00pm.

On 9 June 2017 at 2.00pm the parties appeared and orders were made for Mr Kahler’s application for interlocutory relief to be heard at 2.00pm on Thursday, 15 June 2017. At the time those orders were made, Mr Gor foreshadowed the possibility that the Club may have some difficulty complying with the orders, not least because the intervening weekend was a long weekend and access to its proposed witnesses may be delayed because of that.

At the Club’s request, the proceedings were relisted on Wednesday, 14 June 2017. The Court accepted Mr Gor’s submission that his client could not be ready by the proposed hearing date, being the next day. The Court made orders amending the timetable with the result that the hearing of prayer 6 of Mr Kahler’s summons was fixed for 12 noon on Friday, 16 June 2017 — being the last working day before the date of the Meeting.

Prayer 6 of the summons sought “Interim orders in terms of paragraphs 3, 4 and/or 5 hereof”. Those paragraphs were:

The hearing commenced at noon on 16 June 2017 and concluded shortly after 4.00pm. At the conclusion of the hearing I had come to a clear view about what should happen and decided that orders should be made immediately so that members of the Club would have notice over the weekend of the Meeting being restrained. Owing to another matter requiring urgent attention in the Duty List that afternoon, I was unable to deliver ex tempore reasons.

I gratefully acknowledge the assistance I derived from substantial written submissions provided by each party, as well as oral argument which was no less effective for the economy with which it had to be presented. I do not propose in these reasons to deal with every argument raised by the parties in their written submissions. These reasons are confined to the matters which I found persuasive for the purposes of resolving the interlocutory argument.

Two other aspects of how the proceedings were conducted should be recorded. First, the Club did not suggest that, if Mr Kahler was otherwise entitled to interlocutory relief, it should be denied on the ground of laches. Second, both parties accepted that, given the timing, because the grant of an interlocutory injunction would be tantamount to final relief, the Court had to be satisfied to a high degree both as to the strength of Mr Kahler’s case and as to where the balance of convenience lay between the parties.

The facts may be briefly stated.

On 14 December 2015, the Club held an extraordinary general meeting to consider, in broad terms, how the redevelopment of the Club was to be achieved. The meeting had the benefit of an extensive slide show presentation in which the various options were presented. The ultimate recommendation was to pursue a joint venture partner. One of the slides asked the question “When do members get consulted on the designs?”. The stated answer included “Member consultation is paramount” and “Submitted to members for comment and approval PRIOR to any submission to council and department of planning”.

The December 2015 extraordinary general meeting passed the following resolution:

During 2016 the Board received “best and final offers” from applicant joint venture partners. One of the applicants was Sekisui House Australia Holdings Pty Ltd (“Sekisui House”).

The best and final offers were evaluated by the Club’s independent consultant, CBRE Pty Ltd, in a detailed document entitled “Shortlisted Proponent Best and Final Offer Evaluation” dated 29 November 2016. That document was before the Court as part of a confidential exhibit.

On 19 December 2016, the Board of the Club sent an email to members which included:

Between February and May 2017 either the Board of the Club or a group known as the “Executive Advisory Panel” hosted several information nights for members. The PowerPoint slides that were used in those presentations were in evidence. It is clear from an examination of those slides that explanation and consideration of Sekisui House’s proposal formed a significant part of the discussion. A “Frequently Asked Questions” document dated 3 May 2017 and sent to members refers to the fact that “the Board is well down the path of finalising what a proposed redevelopment of the Club’s real estate assets could look like”, it also refers to “the proposal as it currently stands” and includes questions such as “Why did you choose this developer as our preferred developer over other developers?”. A reasonable reader of that document would be left in no doubt that the Sekisui House proposal was the proposal under consideration by the Board.

On or about 23 May 2017 the Notice was despatched to members, giving notice of the Meeting to be held on 19 June 2017.

Mr Kahler’s first submission was that the Notice was invalid and the Meeting should be restrained because, insofar as the second part of the Resolution (see paragraph 2 above) purported to give approval for the purposes of Rules 43 and 44 of the Club’s Constitution, the Resolution was ineffective to do so.

The following provisions of the Constitution were relevant:

Shortly put, Mr Kahler’s argument was based on the fact that, as was conceded by Mr Gor, the Resolution did not identify any specific proposal or any specific amount in respect of a liability to be incurred. Such matters, it was submitted, had to be specified in a resolution for the purposes of Rules 43 and 44.

It was contended that the need for such specificity was demonstrated by the following:

Stripped to its essentials, the Club’s response to these arguments was an appeal to strict literalism. The words “sales”, the “entering into liabilities”, “any spending or commitment of the corpus amount”, and “any borrowings” or their cognate grammatical expressions all appeared in Rules 43 and 44. Approval for such things was being sought provided that they were “approved by the Board in connection with any redevelopment within the PRA”. The Club submitted that approval by the Board (necessarily after the fact of the non-specific approval by the members) was sufficient to identify the activity for which authority would be given by the passage of the Resolution.

For the reasons advanced by Mr Kahler, I was well satisfied that not only was there a serious question to be tried as to whether the second part of the Resolution would be effective to give approval for the purposes of Rules 43 and 44, but that there was a very strong case that his submissions were correct. Without expressing a final view, it seems to me that to adopt the construction contended for by the Club would be to undermine completely the evident protective purpose of Rules 43 and 44, which repose significant financial and property related decisions in the members in general meeting. Putting it another way, if the various consent provisions set out in Rules 43 and 44 permit the conferral of authority on the Board in the almost limitless terms proposed by the Resolution — being qualified only by having to be “in connection with any redevelopment within the PRA” — then it is difficult to see what purpose the consent provisions serve.

At least insofar as the Resolution relates to Rules 43 and 44, the conclusion which I have expressed in the preceding section of these reasons necessarily means that the Explanation is inadequate for want of identifying specific amounts of expenditure or specific proposals. However, that does not deal with the entirety of the Resolution and, theoretically, it would have been possible for that part of the Resolution to have been withdrawn. It was therefore necessary to consider Mr Kahler’s argument in relation to the entirety of the Resolution to the effect that the Explanation was not sufficiently detailed to discharge the Board’s duty to the members to provide them with sufficient information to make a properly informed judgment on the matters in question.

There was no dispute between the parties as to the applicable legal principles, including where, as in this case, the directors were positively recommending a particular course to the members. There are numerous statements of principle by the most experienced commercial judges of this Division.

A convenient starting point is this dictum of McLelland J (as his Honour then was) in Chequepoint Securities Limited v Claremont Petroleum NL (1986) 11 ACLR 94 at 96–97:

The pertinent passage in the judgment of Young J (as his Honour then was) in Devereaux Holdings Pty Ltd v Pelsart Resources NL (No 2) (1985) 9 ACLR 956 (“Devereaux”) at 958 is:

In Buttonwood Nominees Pty Ltd v Sundowner Minerals NL (1986) 10 ACLR 360 at 382, Young J (as his Honour then was) expressed the relevant test similarly (emphasis added):

Two more recent judicial observations are also apposite.

In many cases, mere assertions by the directors in a form which does not give the members an opportunity to review or critique the information will not satisfy the fiduciary obligation of disclosure. So, for example, in McLaughlin v Dungowan Manly Pty Ltd (2006) 59 ACSR 686; [2006] NSWSC 1001 (“McLaughlin”), Barrett J (as his Honour then was) said at [22]:

Finally, in ENT Pty Ltd v Sunraysia Television Ltd (2007) 61 ACSR 626; [2007] NSWSC 270, Austin J said at [25] (emphasis added):

Before turning to the parties’ submissions, one piece of statutory context needs to be supplied. The first part of the Resolution, which purported to be a declaration of certain property of the Club as not being “core property”, invokes s 41J of the Clubs Act (emphasis added):

It must be acknowledged that the significance of the Resolution insofar as it concerned core property was fairly set out in the Explanation. By declaring the PRA not to be core property, the protections constituted by the need for valuation by a registered valuer, the approval of the disposal at a general meeting and sale by way of public auction or open tender no longer applied.

Numerous alleged deficiencies in the Explanation were identified on behalf of Mr Kahler. These included that the Explanation did not identify:

The Club’s answer to Mr Kahler’s complaint was that the level of disclosure was governed by the nature of the proposal. So much can be accepted. However, in the circumstances of this case, the Club submitted that because the Board was seeking a general mandate unconfined by any specific agreement or plan of redevelopment, the level of disclosure was adequate. While it was true that the Board had selected Sekisui House’s best and final offer as the starting point, there was no certainty that any agreement would be reached with Sekisui House, or whether if one was reached that it would reflect the current best and final offer, or what a redevelopment of the PRA would comprise if the redevelopment proceeded at all.

In the course of making his submissions on behalf of the Club, Mr Gor candidly and properly accepted that, to the extent the Court took the view that any disclosure in relation to the Sekisui House proposal was required, the Explanation was clearly inadequate.

In my opinion, the matters raised on behalf of Mr Kahler demonstrated a very strongly arguable case for the correctness of Mr Kahler’s position. On the other hand, and with no disrespect intended, to summarise the Club’s argument as I have done in paragraph [43] above is to demonstrate clearly, and certainly for interlocutory purposes, the real difficulty which attends it. The argument is that because a broad and unrestrained mandate is being sought by the Board, the explanation proffered in support of it will be sufficient if it is similarly general and high level. On the contrary, and as I shall develop below, it seems to me that the broader the mandate that is requested, the fuller the reasons need to be to justify both the breadth of the mandate and to give an indication, to the best of the knowledge of the Board, of how that mandate is likely to be exercised and the reasons in support of it.

I was persuaded of the strength of Mr Kahler’s arguments as to inadequate disclosure by looking at the matter in two, alternative ways.

First, given the entirely laudable attempts by the Board through newsletters and information nights to give members information about the possibilities for the proposed redevelopment, it would have been obvious to the members (or the hypothetical “average commercial [person] in the street”) that there was a very high likelihood that the general mandate sought by the Board would be exercised by pursuing Sekisui House’s proposal. In my respectful opinion, to the extent that a mandate of the generality sought by the Board could in fact be conferred by the members (a very real question), where there was any realistic prospect that the mandate would be used to pursue a relationship with an identified developer who had made an offer, then proper disclosure could only be given if appropriate details about that developer’s offer were given to the members.

In the present case, that gives considerable force to Mr Kahler’s submission that details of Sekisui House’s offer and its consideration by the Board should have been disclosed to members. Having accepted that proposition, then (as Mr Gor conceded) the absence of any reference to Sekisui House’s offer and its consideration by the Board in the Explanation meant that, even at the interlocutory stage, the Explanation was manifestly inadequate.

The second way in which I consider that it is strongly arguable that the Explanation is inadequate puts the Sekisui House proposal to one side and takes the Resolution at face value as a request for “carte blanche” authority. Assuming, for the sake of the argument, that as a matter of corporate law generally and in the circumstances of the Club in particular, such a wide mandate could properly be conferred on the Board, it is strongly arguable that the obligation to give proper disclosure to members includes the fullest possible explanation as to why such an extraordinary discretion had to be conferred on the Board.

The Explanation contains statements such as “The likely redevelopment is commercially complex. It is not practicable to finalise the details and the negotiations and to make final feasibility, financial, strategic and operational assessments, except through final decisions by the Board. … The Board needs to be free to make the final decisions without having to go through further processes.” In my opinion, the average commercial person in the street would find such statements highly unusual. Even an average commercial person would be aware that very complex and valuable transactions (for example, schemes of arrangement, and major corporate acquisitions and sales) are regularly negotiated to the point of exchange of final, detailed contracts subject only to court or shareholder approval. When I put this to Mr Gor in argument, he was unable to offer any reason peculiar to the legal or other circumstances of the Club as to why that approach could not be followed in relation to the proposed redevelopment.

More pertinently, the Explanation, while making assertions of the kind which I have recorded in the preceding paragraph, offers very little by way of explanation in support of them. The closest it comes is:

In my view, in circumstances where the legal advice appears to be the only basis proffered for powers of such width to be conferred on the Board in relation to the proposed redevelopment, it is strongly arguable that details of that advice, or the advice itself, would need to be provided to members so that they could have their own lawyer make a check or critique (to paraphrase Barrett J in McLaughlin — see paragraph [38] above).

The strongly arguable importance of disclosure of the advice is also supported by two other matters.

First, there was no suggestion in the Explanation that either Sekisui House or any other potential counterparty had indicated that it would be unable to treat with the Club in the absence of the Board having such a wide mandate.

Second, there is real ambiguity in the statement that “based on the legal advice that the Board has received, the proposed resolution is the best (and only practicable) way for the Club to be in a position to address these various issues and offer that contractual certainty”. The ambiguity is whether the advice is to the effect of the conclusion contained in that statement or whether the advice is in relation to other matters, on the basis of which the Board has reached the conclusion set out in that statement. That ambiguity itself points to the arguable inadequacy of the disclosure. Furthermore, as to the first possibility, I have already concluded that the legal advice (at least as to its effect or, better, in its terms) arguably should be disclosed. If the second hypothesis is correct, then both the advice and the subsequent reasoning of the Board, it is strongly arguable, would need to be given to members to satisfy the directors’ fiduciary duty of disclosure.

Where, as here, the Court comes to the conclusion that the plaintiff’s case is very strongly arguable, the balance of convenience can assume less significance in the interlocutory calculus. However, in this case, whether it is important or less important, the balance of convenience was all one way. On proper analysis, the Club was unable to prove any real prejudice that it would suffer if the Meeting was restrained.

Mr Gor submitted that there was some evidence of the possibility that Sekisui House could withdraw from the proposed transaction. Two observations need to be made about that submission.

First, Mr Gor fairly accepted that the only evidence in support of that proposition was evidence from a property development consultant retained by the Club expressing the concern that Sekisui House could withdraw from the transaction if there was a delay in entering into a project development agreement with Sekisui House or refusing to enter into a heads of agreement with Sekisui House.

However, as Mr Gor accepted, the consultant’s evidence does not give any reasons for that concern. There was, for example, no evidence from Sekisui House that it might withdraw if the negotiations were delayed by the meeting being restrained. On the contrary, the evidence disclosed that Sekisui House have a significant development site which adjoins the Club. In those circumstances the Court would, if necessary, infer that there was a real commercial attraction for Sekisui House in treating with the Club which would make the prospect of withdrawal unlikely. That prospect is further diminished in circumstances where there was no dispute that, after assessment, Sekisui House knew that it was now in the position of preferred development partner.

Second, reliance on the possibility of Sekisui House withdrawing discloses a telling inconsistency in the Club’s case. On the one hand, one of the reasons for the “carte blanche” sought by the Board advanced in the Explanation was that no agreements had yet been entered into, and the fundamental question of whether or not any redevelopment would proceed at all remained live for the Board’s consideration. The tenor of that explanation was to minimise the importance of the position which had been reached with Sekisui House. If that be so, it is inconsistent for the Club to raise the possibility of Sekisui House withdrawing its interest as a balance of convenience factor weighing against the Meeting being restrained.

Putting it another way, if the potential role of Sekisui House was important enough to go to the balance of convenience, then that supports the Court’s conclusion that the Board’s current intentions and state of knowledge in relation to Sekisui House’s proposal was of sufficient importance to have been the subject of full and frank disclosure to the members in the Explanation. In any event, the evidence does not permit the Court to conclude that there was any risk of Sekisui House withdrawing if the meeting was restrained.

The Club relied on this dictum of Young CJ in Equity (as his Honour then was) in Countouris v Kallos (2008) 67 ACSR 543; [2008] NSWSC 840 at [14]:

There is, with respect, a great deal of common sense in his Honour’s observation. In the present case I did give serious consideration to whether the Meeting should be permitted to go ahead, but on the basis that if the Resolution was passed then the Club should be restrained from acting upon the Resolution pending final determination of its validity. That course of action was also attractive because of the possibility that the present dispute could resolve itself by the Resolution being rejected. However, there was no evidence upon which the Court could come to a view as to the likelihood of the Resolution being passed or rejected.

There were three reasons why I decided in this case that the Court should not give effect to what might be described as its customary reticence to restrain corporate meetings in preference to dealing with the consequences of those meetings.

First, Mr Kahler had demonstrated a very strongly arguable case. That consideration urged relief being granted, particularly where the Club had been unable to point to any real prejudice that it might suffer by the Meeting being restrained.

Second, the passage of the first part of the Resolution in relation to core property would, if the Resolution was valid, work an immediate change in the legal status of that property as set out in s 41J of the Clubs Act (see paragraph [40] above). That change of status would have occurred irrespective of any further injunction against the Club. In the exercise of the Court’s discretion, I considered it to be highly undesirable for there to be a doubt as to the status of the PRA which would have been the result of the passage of the Resolution in circumstances where there was a real issue about the validity of the Resolution. That doubt, for example, may have made it difficult to prepare accurate accounts of the Club as at 30 June 2017 (see s 41J(2) of the Clubs Act).

Third, I was mindful of Young J’s observation in Devereaux set out in paragraph [35] above that the jurisdiction in relation to enforcing the fiduciary duty of directors to make proper disclosure to members was directed to the protection of those members who had decided, in effect, that it was not worth attending the meeting because they were content to leave the matter to the majority of the meeting. That purpose would have been undermined by allowing the Meeting to proceed. Furthermore, although not decisive, I was fortified in this conclusion by there being evidence that some members were under the impression that the subject matter of the Meeting was to adopt or approve the Sekisui House proposal rather than to give the Board a more general authority.

It is appropriate that I conclude these reasons by repeating an observation which I made to the parties at the conclusion of the hearing.

Cases such as this inevitably generate tension between the protagonists, all of whom are members of the Club. Some of the material which I saw in the evidence demonstrates that this case is no different in that regard.

The Court has not been invited to consider, and has not considered, the merits of any proposed or actual decisions by the Club’s Board in relation to any redevelopment.

Furthermore, the Court was not invited to make, and has not made, any finding as to the good faith of the various protagonists. While there was some material in the evidence to which brief reference was made that might have been said to reflect upon the conduct of both parties, it was irrelevant to the decision which the Court was required to make.

Looking at the course of events in their totality as it appeared in the evidence, I have no doubt that all of those involved in this litigation have acted in what they considered to be the best interests of the Club and its membership. The Court’s decision was reached by the application of specific legal principles concerning corporate decision making in the statutory context of the Club’s Constitution and the Clubs Act to the limited and uncontroversial facts that were relevant to the determination of Mr Kahler’s interlocutory application. Nothing in these reasons should be construed as being intended to say anything, and certainly not anything adverse, about the conduct of the protagonists. Kahler v Castle Hill CC - Letter to members (64.5 KB, pdf) Kahler v Castle Hill Country Club Notice of general meeting (245 KB, pdf)